Depending how you measure it, the mobile platform may already be the widest path from the software developer to the ordinary person. It’s for sure the fastest-growing. So presumably there’s serious software money to be made. But how, exactly?

Back in the heady early days of the App Store’s first rush of cash, the vision seemed clear: You crank out a wicked-cool mobile app, you fly PR people around in first-class, you rake in the dough. What could be simpler? I never believed it in the slightest.

Let’s go back to basics. Here are the ways I can think of to make money that involve mobile applications:

  1. App sales.

  2. Upgrades and in-app sales.

  3. Ad sales.

  4. Server-side revenue enablement.

1. Selling Apps · This isn’t a big business, yet, but that doesn’t mean much. Wikipedia suggests that the total app revenue last year was on the order of $2B. That sounds like a big number. But if you divide it by the number of active developers, it sounds small. But if you realize that three years ago it was zero, it sounds big. But if the revenue distribution follows an inverse-square law, it sounds big for hitmakers, small in the long tail.

On that last, I don’t know for sure; I haven’t done the math on Android Market, but the smart people I know living in App-Store territory think the money flows down an inverse square-slope.

Inverse-squares on 2 billion

y = (2×109) / (x2)

A simple inverse-square distribution of two billion dollars. Dollars are on the Y axis, developer numbers on the X. The shape of the curve is what’s interesting, not where it happens to cross any particular data threshold.

Anyhow, the take-aways are twofold: First of all, the number of people making serious money selling apps is pretty small. Second, that doesn’t matter very much, because we’re so early in the game that we don’t know how it’s going to shake out. For heaven’s sake, Forrester claims that the market will hit a $38B run rate in four years. I’ll avoid snarky comments on their methodology and stand by my claim that nobody really knows.

Having said all that, I deeply believe that the app-sales business sucks. Selling anything on a one-time basis at a price below $10 is historically the kind of business that’s been owned by companies like Walmart. I acknowledge that it’s working for some people, but it’s just not where I’d want to be.

2. Upgrades and In-app Sales · Although these are different things in the mind of your customer, they blend together in practice in terms of how you implement and sell them. The notion of charging for software upgrades is as old as software, and is perfectly sensible. You pay me some money for the use of some software I’ve written, and I go on writing more of it, so it’s reasonable to ask you for more money if you want that too.

In-app sales are closely related, whether you’re selling magic wands to gamers or songs to music lovers or advice to the lovelorn. Apple has had this for a while and Android is just rolling it out.

I love this way of doing business. A basic principle of running a business is that your best potential new customer is an existing customer. Someone who’s spent money with you before and got good value is totally predisposed to open the wallet again. Any sane businessperson would rather have a continuing relationship with a customer, rather than a one-off transaction; and most people, when they’re acting as customers, would rather deal with someone they know. So this is a win-win all around.

3. Ad Sales · I work for Google, and this is obviously one of our strengths. I don’t have the strong positive vibe about ads that I get about the relationship selling, as in upgrades and in-app. Having said that, I know for a fact from talking to developers that ads are starting to work pretty well for some of them. And I suspect that the ratio between the amount of work you have to put in and the amount of money that comes out is pretty attractive for ads, as opposed to cooking up new things to sell to users.

I have a hunch that this will play out even more strongly in the world of tablets, where there’s more room on the screen to integrate ads gracefully without getting intrusive.

4. Server-side revenue enablement · As an old Web guy, I’ve always thought that on the Internet, the real money comes from stuff you do on the server, not stuff you do on the client. My time in the Android world hasn’t changed my mind all that much.

For example, one of the most-used apps on all my Android devices is TripIt. It’s a travel organizer; a big time-saver in getting yourself organized, and a total lifesaver on your handset when you’re walking through a strange airport trying to fish out your hotel’s address for the customs form or the taxi driver.

The app is free, but its slickness helped convinced me to sign up to TripIt’s for-pay service. The other free app that sends my money to its provider is Kindle (and we’re talking serious money, I just spent $8 for a book that went across my radar while I was writing this piece).

Server-side revenues at least have the benefit that the business models have been here for a while and we’ve got some expertise in how to build and grow them.

What We Don’t Know Yet · Nobody has any idea how big the mobile-software business is going to get. I’m pretty sure that the current $2B/year run rate is going to look small in the rear-view at some point, but when? And how’s the cash flow going to be dealt out among initial sales, follow-on sales, ads, and services? I think my biases are pretty obvious if you’ve read this far, but in fact nobody knows.

One thing we really don’t know, and the question I’ll take up last, is whether this space will enable new kinds of businesses.

Lifestyle? · If you haven’t already, I recommend you read Anil Dash’s Mom and Pop, at Web Scale. This one resonated deeply with me; both times I helped launch a company, it was a classic VC-fueled swing-for-the-fences play; an approach which I now believe to be more or less completely insane. If I do it again, it’ll be lifestyle+Web all the way.

If you look at the mobile-apps business, well, it’s just not all that big. Even the kind of money that Rovio’s pulled in with Angry Birds does not point at the kind of exit that makes a venture investor’s heart go pitter-pat. But I bet the management over at Rovio is pretty happy nonetheless.

My hope is that mobile software is a field in which a thousand lifestyle-business flowers can bloom; that it becomes a place where you can actually make a decent living in the long tail. I’m pretty sure that if this happens, that lifestyle money isn’t going to be wholly or even mostly from app sales. This table needs all four legs to hold it up.



Contributions

Comment feed for ongoing:Comments feed

From: anakin78z (Feb 28 2011, at 15:25)

Funny that you mention wands. I have a spellbook app (Spellbook - PF) which I'm currently selling, but will likely make free and switch to in-app purchases. It makes several things easier, dealing with certain licensing issues, and I'm hoping it will actually increase my sales. My download rate is a small fraction compared to another similar free app I also have on the Market. I'm hoping that if users actually get to use the app, they'll feel better about spending the $2 on an in-app purchase. Crossing my fingers ;)

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From: Simon Edis (Feb 28 2011, at 17:43)

Another big ticket money earner for mobile apps is iTunes referrals. Using companies like LinkShare you can make 5% from every link you send to iTunes - in our experience the revenue is on par with what we see from ad sales.

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From: Rick (Feb 28 2011, at 18:13)

Most of my apps are all free and get moderate downloads but I just recently tested one of them as a paid app. I already know the outcome which is to be lower sales but the flipside is that ads aren't bringing in the money either but I'm testing right now so we'll see where it goes.

In theory, in-app purchases seem like a home run as people loved shareware back in the day and still like to get teased a bit before they buy so I *think* I'll have to figure out that model and move towards it.

Has anyone tried all three? What are your results?

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From: John (Feb 28 2011, at 18:39)

"Having said all that, I deeply believe that the app-sales business sucks. "

I deeply believe that life sucks but the relevant question is "compared to what"? It sure beats the alternative.

Regarding apps -- I am contemplating developing an app. I don't know if I will but without the iOS app store it wouldn't even be an option. My purpose would not be to make a living at it -- my purpose would be to use the app as a way of getting attention for my consulting services and I would view the ability to charge for the app as a nice bonus (I won't give it away for free -- that would diminish the perceived value of what I'm offering).

My points simply that there may be more people benefiting in the long part of the tail than you realize.

Also, don't underestimate the value of a huge market with very little piracy.

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From: len (Feb 28 2011, at 19:08)

iTunes is also a sub $10 market. If YouTube actually paid say 79 cents a download, I'd be averaging $418 a period (ten days) right now. And scale being local, that would be reaalll nice if not Bieberland. Just sayin'.... and thanks for the unlimited length privilege. Nice to have for some future project.

I suspect software being paid for a single download could do a lot better. It took four years moreorless to build from a gurgle to a low boil in the statsbowl with FB being a significant amplifier. My sense is it's a bit easier to move music than software on FB, but the games folk figured it out, so...

If one is an independent information or system producer of any kind, getting to the point where there is enough revenue to live responsibly (don't know what comfortably means; only what it takes to feed the mice and the kids) is the trade off to being on a corporate or investor dole of some kind. As we learned in music, better to drive a VW than watch all future revenues drained into someone else's SUV.

" If I do it again, it’ll be lifestyle+Web all the way."

I'd like to read an expansion of that thought if you get the time. Lifestyle?

Seems to be the same problem as for the musicians and other original content producers: stay local as long as you can in physical expenses and go global in everything virtual.

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From: Mikey (Feb 28 2011, at 19:18)

John Gruber (on Daring Fireball) commented "Why isn’t (Apple/App Store/developers) selling apps for under $10 as good a business as (Amazon/Kindle/authors) selling books for under $10? I don’t think the app-sales business is easy, not by a long shot, but Apple is proving that it doesn’t have to suck."

These sales don't suck for Apple/Amazon, but may well suck for developers/authors …

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From: Aslak Gronflaten (Feb 28 2011, at 22:55)

@Rick: I have both paid apps, free apps with ads and one with in app purchases on Apple's appstore. So far my paid apps pay the most, ads second, but far behind, and in app purchase giving the least. This despite download numbers being a magnitude higher for the free apps. Of course, there is a myriad of factors influencing this as well, so your milage may vary. A lot.

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From: fui (Mar 01 2011, at 07:39)

Very interesting post, ty.

A couple of notes about the first "way", selling apps.

You make it sound that appstores low pricing in exchange of a vague promise of volume is devaluing the software business, but if you were already, say, in the desktop software business before the introduction of iOS, you probably would see it in a different way.

I mean, trying to make a living selling 10-30$ small apps to the 20-30 millions Mac installed base circa 2005 wasn't much better than selling 1-10$ apps to the 100+ millions and steadily growing iOS installed base of today (which btw has comparatively a higher propension to buy apps).

Of course, if you intend to write very complex software which requires a lot of man-hours to develop, you've to think trice about it and be very cautios in evaluating the volume potential, because the mobile market hasn't specialized niches to which you can confidently try to sell 80+ $ specialized apps, which were typical of the desktop market.

But for the small/casual/utility apps software houses, the opportunities are still way interesting IMHO in mobile.

Also, lots of devs like to have little free-time pet projects, and for them the appstore model is a great way to monetize on that.

The cool little thingies that many devs released as freeware with a paypal donate button in the desktop time become 99c apps in the mobile world, with the chance, albeit small, of making you rich as opposed to paying the web hosting bill with the donations.

Yeah the app could go completely unnoticed, landing you just small change, but it's not such a risk if you already pay your bills with other income, be it employee or contractor jobs.

That inverse-square slope you picture for the money flow isn't just an app-store territory thing.

To the contrary, it's basically the typical curve for entrepreneurship endeavours in the web-economy.

You have it everywhere from the web startups business to the ad-supported blogging scene.

In app-store territory the base of the tail income can be particularly low, but so it can be the effort required to bring a project to the market.

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From: Ed Tennant (Mar 01 2011, at 10:36)

Thanks for a providing a great road map. I agree that we don't really know what it will look like down the road but you have given us a wonderful start. It is exciting that the future isn't certain and we get to help invent it.

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From: Rob Banagale (Mar 01 2011, at 16:47)

Nice fragment here.

I'd add that the subtext to the title "How to Make Money in Mobile" is "(in the short term)"

Big brands that are looking at Mobile today are not often leveraging any of these monitization methods you've described.

They are investing in the strategic importance of establishing themselves as leaders in their respective industries. They are sending signals to their most influential customers, "you can trust us to be there on mobile too."

Big companies are investing in great mobile applications that help people. They are creating a situation where users associate their brand with a great mobile experience.

This is how big businesses are going about "Making Money in Mobile" a few years from now. It also might help to explain the 1st class PR person you ran into at the airport.

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From: vishi gondi (Mar 01 2011, at 19:21)

If you look at any market, there are some things people need to buy. All other things earn revenue by referring users to those products.

Referrals based revenue could be a great way to earn money, esp. if the oracle of mobile (voice search) pays you for integrating it into your app.

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From: Brian (Mar 01 2011, at 19:41)

How about app developers making money through sales of products and services? API's are coming out which enable this. For example, our API lets new and existing mobile application sell flowers. Similarly, other API's are coming out that enable small to medium sized businesses to have great reach through their affiliates which conduct eCommerce transactions directly. It is still early in the game for sales through eCommerce API's but to me that just means the opportunity is even greater.

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author · Dad · software · colophon · rights

February 26, 2011
· Business (106 fragments)
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